Innovation can be described as ‘the profitable leverage of ideas’. It can be a new product (Innocent smoothies), a new brand extension (Smirnoff Ice), a new service (debit card payments), or increasingly with the advent of the networked age, a new business model (zopa.com). Most innovation tends to be incremental – a small improvement to a product or service or a more significant leap that only a few of the very wealthy can afford. They tend to do little to reshape, or ‘disrupt’, the market as a whole1.
However, every now and again, a person or company has a ‘big idea’ that disrupts the market entirely. Such a ‘disruptive innovation’ permanently changes the rules of the market place, shifts consumer opinions and assumptions about what a good or affordable product is, creates new consumer or customer behaviors and repositions the competition by default. In other words, they leapfrog the incumbents and market leaders, usually killing them off in the process. Netflix in the USA (the equivalent to LoveFilm.com in the UK) is a good example of this in action.
Before Netflix hit the scene, the main solution for customers wanting to watch movies at home was the local video store. As we all know to our regret, these businesses make the majority of their profits on late fees. In the 80s, Blockbuster pioneered a supply-side business model (serving the industry and not the end beneficiary) that effectively locked consumers away from the latest movies until Blockbuster had made their profits on new releases. Blockbuster was sold at one stage for $8.5 billions dollars, and was reportedly opening a store every 17 hours. Netflix was launched into this system and disrupted the status quo.
Netflix has developed a radical new business model that is consumer-centric and web-enabled. You pay a fixed fee for a certain number of DVDs, which you can keep as long as you like, which means late fees have been abolished. Netflix massively reduced overhead by making all transactions occur over the web and through the regular post. In a little over ten years, Netflix has built up 15 million subscribers, has posted its billionth DVD, and has 5 times as many visitors to its site than Blockbuster, the former market dominator.
A sure way of telling a market disruption, once Netflix had launched their services, Wal-Mart, Blockbuster, Amazon and more all raced to catch up. They had been suddenly repositioned as laggards behind the new kid in town. With only around two thousand employees, Netflix has a market capitalization of around $7 billion, and its share price has risen by roughly 60% since the start of the 2008 downturn. Blockbuster, the legacy company with 6500 stores worldwide, has a market cap of $78 million. In march of this year, its auditors expressed doubts that is was a viable concern. It is in default on a $45 million interest repayment as I write. This is disruption in action.2
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